"Live Where You Want. Invest Where it Makes Sense!" ™

I came up with the following rules of successful real estate investing over my many years of successes and failures. These are the same rules I follow today and share with our clients at Norada Real Estate Investments.

1. Educate Yourself

Knowledge is the new currency. Without it you are doomed to follow other people’s advice without knowing if it’s good or bad.

Knowledge will also help take you from being a “good” investor to becoming a great investor, and that knowledge will help provide a passive stream of income for you or your family.

2. Set Investment Goals

A goal is different from a wish; you may wish to be rich, but that doesn’t mean you’ve ever taken steps to make your wish come true.

Setting clear and specific investment goals becomes your road map and action plan to become financially independent. You are statistically far more likely to achieve financial independence by writing down specific and detailed goals than not doing anything at all.

Your goals can include the number of properties you need to acquire each year, the annual cash-flow they generate, the type of property, and the location of each. You may also want to set parameters on the rates of return required.

3. Never Speculate

Always invest with a long-term perspective in mind. Never speculate on quick short-term gains in appreciation, even in a heated market experiencing double-digit gains. You never know when a market will peak and it’s usually 6 to 9 months after the fact when you find out. Don’t chase after appreciation. Only invest in prudent value plays where the numbers make sense from the beginning.

4. Invest for Cash-Flow

With few rare exceptions, always buy investment property with a positive cash-flow. The higher, the better. Your cash-on-cash return is directly related to the before-tax cash-flow from your property.

Cash-flow is the “glue” that keeps your investment together. Your equity will grow over time (through appreciation and loan amortization), while the cash-flow covers the operating expenses and debt service on your property.

5. Be Market Agnostic

The United States is a very large country made up of hundreds of local real estate markets. Each market moves up and down independently of one another due to many local factors. As such, you should recognize that there are times when it makes sense to invest in a particular market, and times when it does not. Only invest in markets when it makes sense to do so, not because you live there or you bought property there before. There’s an element of timing and you don’t want to buck the trend.

6. Take a Top-Down Approach

Always start by selecting the best real estate markets that align with your investment goals. Most investors start by analyzing properties with little to no regard of its location. This can be a big mistake if you don’t consider the investment in light of the market and neighborhood it’s in.

The best approach is to first choose your city or town based on the health of its housing market and local economy (unemployment, job growth, population growth, etc.). From there you would narrow things down to the best neighborhoods (amenities, schools, crime, renter demand, etc.). Finally, you would look for the best deals within those neighborhoods.

7. Diversify Across Markets

Focus on one market at a time, accumulating from 3 to 5 income properties per market. Once you’ve added those 3 to 5 properties to your portfolio, you would diversify into another prudent market that is geographically different than the previous one. Typically that means focusing on another state.

One of the underlying reasons for diversification within the same asset class (real estate), is to have your assets spread across different economic centers. Every real estate market is “local” and each housing market moves independently from one another. Diversifying across multiple states helps reduce your “risk” should one market decline for any reason (increased unemployment, increased taxes, etc.).

Even if you don’t live in Texas, you can invest in the Houston Real Estate Market, which is becoming a hotbed of buyer activity that could be really beneficial for real estate investors; just ask the multitude of overseas investors who are choosing Houston as the city of choice to invest in for the foreseeable future.

8. Use Professional Property Management

Never manage your own properties unless you run your own property management company. Property management is a thankless job that requires a solid understanding of tenant-landlord laws, good marketing skills, and strong people skills to deal with tenant complaints and excuses. Your time is valuable and should be spent on your family, your career, and looking for more property.

9. Maintain Control

Be a direct investor in real estate. Never own real estate through funds, partnerships, or other paper-based investments where you own shares or other securities of an entity you don’t control. You always want to be in control of your real estate investments. Don’t leave it up to corporations or fund managers.

10. Leverage Your Investment Capital

Real estate is the only investment where you can borrow other people’s money (OPM) to purchase and control income-producing property. This allows you to leverage your investment capital into more property than purchasing using “all cash”. Leverage magnifies your overall rate-of-return and accelerates your wealth creation.

As long as you have positive cash-flow and your tenants are paying off your mortgage for you, it would be foolish not to borrow as much as possible to buy more income property.

Great advice, as usual! And a good strategy check list for foreign investors.

Thank you,

Aldo

Comment by Dan

August 15th at 7:56 am

Nice article I agree with all points for the most part. I think you and many other experts gloss over the hiring of property managers. Third party managers are the scourge of the rental business. Never to be trusted and avoided at all costs. Use them to grow if need be I guess but move quickly to in house management. I will never trust a property manager again…or use one for that matter. They function with closed minds and little respect for the residents of the property they manage…shame on these thugs…now that I have nearly two hundred units I breath easy knowing these clowns are my competition.

Comment by Jim

August 15th at 5:04 pm

Dan,

I am sorry you do not feel Property Managers should breath the air you breath. I disagree, there are great Managers out there. I agree that owners should have a hands on approach and monitor the manager they hire, however, if owners are not in management, they need to stay out. Management as you know is intense, many owners need the guidance and supervision from a Professional. Not all of us can buy and manage 200 of our own units. And the use of the word “clowns” is disrespectable.

One item that you did not list was the need to understand and use the 1031 exchange process. Investors who decide to sell their investment property to acquire better properties or want to leverage into more properties need to understand how Section 1031 of the IRS Code can benefit them. The 1031 exchange allows a taxpayer selling investment property to defer their tax liabilities as long as they follow certain rules and work with a Qualified Intermediary. As a Qualified Intermediary with one of the countries largest companies, I work with taxpayers every day on this part of the tax code. If you are selling investment real estate, talk with your tax professional to see if a 1031 exchange is a good choice for you. If so, speak with a Qualified Intermediary to get the process started.

Hello, I just wanted to say thanks for sharing these great real estate investing insights. The market certainly seems ripe with investment opportunities right now, especially considering the latest mortgage rate news. I also wanted to thank Carmine for the information shared in her comment. Having a working understanding of the 1031 exchange process is one of those things that many investors could overlook when looking to invest in the market.

Comment by Andy Pillinger

October 12th at 12:40 pm

Hi, I currently have 4 rentals with 3 of the mortgaged, one is clear and next spring will come into some cash of around 400K. Can anyone here please give me their opinion on how that money should be spent to maximize its potential with regards to buying cash flow property? For instance what price point is best. Which suburbs? Should I buy outright or buy all with 30% down etc. Any advise would be very grateful. Many thank in advance.

If you want to continue building your real estate portfolio, you’ll probably want to invest in additional cash-flow properties in some of our higher cash-flow (income) markets such as Indianapolis, Kansas City, or maybe Memphis.

Price points vary by market and are market specific. You’ll want to consider and compare the rent-to-value ratios of the markets to find the best market for you.

This is a great set of standards for real estate investors especially first time investors. Research and planning are imperative to the success of your investment property. This is typically a long term investment so take your time in finding the perfect investment property to match your needs and goals! It is also important to have an exit strategy in place BEFORE you make your investment.

This is a great set of standards for real estate investors especially first time investors. Research and planning are imperative to the success of your investment property. This is typically a long term investment so take your time in finding the perfect investment property to match your needs and goals! It is also important to have an exit strategy in place BEFORE you make your investment.

I really enjoyed reading your blogs. You have shared nice tips. Real estate property investing isn’t for those who wants to be a millionaire overnight. It require hard work, market research and long term investment.

Comment by Jessie Peris

June 21st at 2:43 pm

Awesome blog! Great tips for newbie’s to start with a goal, proper planning prevents poor performance. Also, I really like the idea of leverage (OPM) when you have cash on cash flow properties; the opportunity is sky to get private lenders to fund your deals.

I mostly agree with Dan, in that property managers can be a liability. I don’t know if I’d go as far as to consider them clowns and thugs (as it’s possible to find a good one). But especially for beginning real estate investors, it’s an extra step that can reduce efficiency a little.

Comment by shaneforest

September 9th at 4:28 am

Well, I completely agree with all your points.It is very much hard to discover an authentic private money lender for real estate transactions, Private money exchange understands the value of such requirements and initiated there support services to assure the funding need of real estate investors.

Comment by Ruben

September 16th at 6:13 pm

I have a different opinion than Dan’s. I agree that there are property managers that should be out of business. There are also property managers that are excellent. Just like you do your homework in finding a good cash flowing property, you should also do the same for the property manager. I would go as far as to say that finding a good property manager is done first THEN find a property they can manage for you. I have several properties and my property manager has done an excellent job in managing the property.

These are some great tips on investing in real estate. I always say the money is made when you buy the property. So make sure to educate yourself on the property and know what the property will sell for once you fix it up.

Great tips, it helps to know all the scenarios ahead of time in case you come across something you didn’t expect. It’s best to figure out what you would do in all situations and have a plan of action in case. Great points. Thanks

Comment by Dublinkoch

March 12th at 3:14 am

Thanks for sharing great article and I really needed this type of information because recently I joined Lee Arnold seminar in how to invest in real estate.

I would like to re-emphasize the importance of #1 on educating yourself. There are so many ways to invest in real estate so indeed do your due diligence and arm yourself with knowledge. Many investors end up studying and never pulling the trigger. The first deal is always the hardest but after that, you end up trying to figure out how the deal could’ve been better. You can learn so much from studying but once you get your feet wet, you will quickly learn the lessons you have read about. Remember, surround yourself with successful investors who are active. This business can be very rewarding, especially if you enjoy it.

Hi Marco, thanks for sharing your experience. It will be helpful for a real estate agent. Knowledge is the new currency. Without it you are doomed to follow other people’s advice without knowing if it’s good or bad.

Hi Mike — I don’t recommend self-managing one’s own properties in most cases. It’s important to vet the right management company. There are interview questionnaires online and in our blog. A good place to start is to listen to our Passive Real Estate Investing podcast episode on property management.

Hey Marco,
Quite a nice and in-depth advice has been given here. I just want to pitch in that I am in complete agreement with the notion that investing in real estate requires a lot of patience and hard work. It all starts from educating yourself to getting the grip over the market with patience.

All of these “rules” are great, especially #1. Knowledge is power. And you damn well better have a lot of knowledge before you go out and “borrow as much as possible to buy more income property”, or you could end up in a hot heap of trouble.

Very strategic post you came up by. Great real estate investing points to be look upon while investing on a property deals. It’s definitely better to educate yourself first so that you could convince others well.

It’s important to be prepared when taking on real estate investing. This means everything from educating yourself to having the proper funds. Anyone looking to start investing in real estate could benefit from reading this article. Great post Marco!

Comment by Donna

January 29th at 6:21 am

Great article with some valid points. The rules will slightly change depending on ones personal circumstances and investment goals but education is one rule that always remains. It is an absolute must for sustained success in Real Estate or any other industry.

Hello! Marco Santarelli,
Thanks for given proper guide on real estate investing. After reading your articles, anyone will be clear on real estate investing. I fully agree with your rules, and why not as I am also a home buyer in Oakland.